Morgan Stanley (MS) reported first quarter 2010 operating net income of $1.8 billion or $1.03 per share, compared to a net loss of $17 million or 41 cents per share in the year-ago quarter.

The results were substantially ahead of the Zacks Consensus Estimate of 59 cents per share. Post-economic crisis, Morgan Stanley marked the third consecutive quarter of income in a year’s time.

GAAP net income per share was 99 cents, compared with a net loss of 57 cents in the year-ago period. The reported quarter included a loss of $932 million on the planned disposition of Revel Entertainment Group, LLC, a subsidiary of Morgan Stanley, which was partially offset by a gain of $775 million related to a legal settlement with Discover Financial Services.

Results were aided by robust underwriting revenues in the investment banking operations, resulting from higher levels of market activity, prime brokerage, wealth management business and sales and trading revenues that increased due to the impact of the improvement in Morgan Stanley’s debt-related credit spreads.

Net revenues for the quarter were $9.1 billion, significantly up 213% year-over-year and 33% from the prior quarter. Segmental revenues are as follows:

Institutional Securities revenues were $5.3 billion, up 234% from the prior-year quarter and 65% from the prior quarter. Strong growth from underwriting revenues (up 40% year-over-year to $560 million), fixed income sales and trading revenues and investment gains were partially offset by advisory revenues (down 20% year-over-year to $327 million) and equity income sales and trading revenues on low levels of market activity.

Global Wealth Management revenues were $3.1 billion, up 139% year-over-year but down 1% from prior quarter, primarily due to strong revenue growth from Morgan Stanley Smith Barney.

Total client assets were $1.6 trillion at year-end. Client assets in fee-based accounts were $413 billion and represent 26% of total client assets. Net new assets were recorded at $5.8 billion. At quarter-end, the 18,140 global representatives achieved average annualized revenue per global representative of $685,000 and total client assets per global representative of $88 million.

Asset Management
revenues were $653.0 million, significantly up from $22.0 million in year-ago quarter. Revenues were up 28% from prior quarter primarily due to increase in core revenues to $414 million, up 47% from the year-ago quarter, and investment gains. Merchant banking business also improved to $239 million compared to negative revenue of $259 million in the year-ago quarter.

During the reported quarter, total interest expense declined 41% year-over-year but increased 14% from the prior quarter to $1.4 billion. Total non-interest expenses increased 86% year-over-year and 6% from the prior quarter to $6.6 billion.

As of Mar 31, 2010, total assets under management of $262 billion, compared with $250 billion as of Mar 31, 2009, reflected market appreciation partly offset by net customer outflows, primarily in Morgan Stanley’s money market funds. During the quarter, Morgan Stanley was ranked #2 in global completed M&A, #4 in global announced M&A and #3 in global IPOs.

As of Mar 31, 2010, the company did not repurchase any shares of its common stock as part of its capital management share repurchase program. Book value per common share was $27.65, based on 1.4 billion shares outstanding. Morgan Stanley’s Tier 1 capital ratio, under Basel I, was approximately 15.0% and Tier 1 common ratio was approximately 8.2%. Total assets were up 31% year-over-year to $820 billion as of Mar 31, 2010.

Dividend Update

Morgan Stanley also declared a quarterly dividend of $0.05 per common share. The dividend is payable on May 14, 2010 to common shareholders of record on Apr 30, 2010.

Morgan Stanley’s growth has been negatively impacted by the after-effects of the financial crisis. As a result, the company is facing major headwinds in order to keep pace with its peers and its industry leading position.

As the economy rebounds in the long term, we believe the company has the potential to realize the full benefits of its strategic and cost-cutting initiatives by disciplined risk-taking, addition of new talent, the continued integration of the Morgan Stanley Smith Barney joint venture and the execution of the Mitsubishi UFJ alliance.

However, the recent downgrade in Morgan Stanley’s industry position, the financial impact of the company’s JV with MUFG that is scheduled to commence in May 2010 and higher-than-expected expenses poses a near-term cautious outlook on the stock.
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